The Securities and Exchange Board of India recently unveiled a proposal that has the potential to reshape the landscape of investments in the country. The proposal centres on the introduction of a new asset class, tentatively named MF Lite. The aim is to offer a regulated framework that empowers mutual funds to venture into the realm of alternative assets and other areas presently available only to HNIs. This would effectively open doors for retail investors, allowing them to participate in the potential gains associated with these asset classes.
The proposed asset class is designed to provide investors with a regulated investment product that offers higher risk-taking capabilities and flexibility in portfolio construction, similar to PMS. However, it will have a higher minimum investment threshold than MFs (but less than PMS), making it accessible to a more niche segment of investors. SEBI proposed a minimum investment of ₹10 lakh for this new asset class, which is considerably higher than the minimum investment required for most MFs.
This initiative by SEBI aims to address the growing demand for investment products with investible funds between ₹10 lakh and ₹50 lakh that offer higher returns and greater flexibility than traditional MFs. MF Lite schemes are allowed to invest in a wider range of assets such as unlisted securities, structured products, and derivatives. The new asset class will offer fund managers more flexibility in constructing portfolios compared to MFs. This will allow them to tailor portfolios to the specific needs and risk profiles of investors. Schemes under MF Lite are expected to have longer lock-in periods compared to traditional mutual funds, reflecting the illiquid nature of some of the underlying assets.
Proposed structure
Given the nascent stage of the MF Lite proposal, it is crucial to draw inspiration from existing structures like AIFs and other funds to design a robust framework. Like AIFs, MF Lite schemes may be allowed to focus on specific alternative asset classes, such as secondaries, pre-IPO investments, and seed capital. This specialisation would enable fund managers to develop expertise in these niche areas and deliver better returns to investors. Currently, retail investors have limited access to private equity and venture capital investments, which play a crucial role in funding start-ups and driving innovation. Allowing MF Lite schemes to invest in these areas would enable retail investors to benefit from the growth of these companies.
To address the inherent illiquidity of alternative assets, MF Lite schemes need to incorporate a shock absorption mechanism, akin to the ones used for debt instruments. This could involve creating a dedicated liquidity pool or allowing for partial redemptions in times of market stress. Moreover, traditionally, banks have played a pivotal role in liquidity transformation, channelling retail deposits into loans and other assets. However, this model is evolving. By allowing MF Lite funds to access securitisation products offered by banks, we could usher in a new era of modern banking. This would enable banks to efficiently manage their balance sheets and free up capital for further lending, while providing MF Lite funds with access to a wider range of investment opportunities.
To strike a balance between accessibility and investor protection, MF Lite schemes could adopt a tiered structure with different investor categories, similar to AIFs. This would allow for varying levels of sophistication and risk appetite. On the whole, SEBI’s proposal for MF Lite is a welcome move. However, it’s crucial to design a robust framework for MF Lite that addresses the inherent risks and complexities of alternative investments.
Saravanan is a professor of finance and accounting at IIM Tiruchirappalli, Venkat is the Executive Chairman and Co-founder at Sernova Financial, UK and Williams is the Head of India at Sernova Financial